JNK India coming with IPO to raise upto Rs 665 crore

JNK India

• JNK India is coming out with a 100% book building; initial public offering (IPO) of 1,60,15,988 shares of Rs 2 each in a price band Rs 395-415 per equity share.  
• Not more than 50% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, not more than 15% of the issue will be available for the non-institutional bidders and the remaining 35% for the retail investors. 
• The issue will open for subscription on April 23, 2024 and will close on April 25, 2024.
• The shares will be listed on BSE as well as NSE.
• The face value of the share is Rs 2 and is priced 197.50 times of its face value on the lower side and 207.50 times on the higher side.
• Book running lead managers to the issue are IIFL Securities and ICICI Securities.
• Compliance Officer for the issue is Ashish Soni.

Profile of the company

The company is in the business of manufacturing the process fired heaters, reformers and cracking furnaces (together, the ‘Heating Equipment’) that are required in process industries such as for oil and gas refineries, petrochemical and fertilizer industries. It has capabilities in thermal designing, engineering, manufacturing, supplying, installing and commissioning Heating Equipment and cater to both domestic and overseas market. The Indian heating equipment market is closely competed among seven companies with the Company and Thermax being the most prominent and comparable players. Over the years it has diversified into flares and incinerator systems and have been developing capabilities in the renewable sector with green hydrogen. 

The company’s business model involves collaboration with its customers, from the initial consultation, specification and design stage to the final installation of the Heating Equipment. Due to its long-standing relationship with customers and its capability to provide customized solutions with a proven track record in product development and execution catering to the diverse needs of its customers, it has a competitive advantage, since there are very few competitors with similar capabilities. As of December 31, 2023, it has served 21 customers in India and 8 customers overseas. Further, 7 out of the 12 oil refining companies in India, are its customers and it has supplied or are in the process of supplying Heating Equipment to 11 of the 24 operating oil refineries across India. Some of its domestic Customers include Indian Oil Corporation, Tata Projects, Rashtriya Chemicals & Fertilizers and Numaligarh Refinery. Further it has catered to overseas customers such as a leading engineering, procurement and construction (EPC) company in Europe, a leading oil & gas exploration & production company in Oman and a middle east arm of European EPC company in oil and gas. Also it has enjoyed repeat orders from certain large domestic customers such as Rashtriya Chemical & Fertilizers, Tata Projects, Numaligarh Refinery and Indian Oil Corporation. 

Proceed is being used for:

• Funding working capital requirements.
• General corporate purposes.

Industry overview

The demand potential for the heating equipment i.e., process fired heaters, reformers, and cracking furnaces have been estimated for Oil & Gas downstream segments only. Overall demand for heating equipment from Indian refineries, petrochemicals and fertilizer (Urea) segments between Fiscal 2024 and Fiscal 2029 is estimated at Rs 270,890 million i.e., approximate Rs 45,000 million on an annualized basis. 61% of this demand would come from petrochemicals followed by 37% from refineries and 2% from fetilizers (Urea). 46% of this demand would come from cracking furnaces followed by 24% from low capex heaters, 16% from high capex heaters, and 14% from reformers. Heating equipment suppliers indicated that order booking has grown by 25% in the last 2 years and the market is showing an upward trend – cumulative order booking for heating equipment in the last 6 years was approximately Rs 150,000 million i.e., Rs 25,000 million on annualized basis. 

The process fired heaters market has high barriers to entry and there are only a handful of suppliers, despite surge in demand. The market has high entry barriers as the engineering of industrial process fired heaters requires a complex understanding of various oil products. If the operation of a process fired heater is interrupted for even one day, users could incur significant losses, which is why suppliers undergo a thorough selection process. Since energy efficiency is one of the key performance indicators of any refinery, petrochemicals and, fertilizer plants and is determined by the efficiency of the process fired heaters, the process fired heaters become a critical aspect for customers and hence selection of suppliers for process fired heater requires strong credentials and references. Besides, there are certain regulatory standards to be mandatorily adhered to in the industry. Therefore, there are limited suppliers who can supply these critical equipment. The Indian heating equipment market is closely competed among seven companies with JNK India and Thermax being the most prominent and comparable players. Bharat Heavy Electricals is also a participant however, its revenue from heating equipment is comparatively lower compared to its other flagship businesses. Other participants in the Indian heating equipment market are, Esteem Projects, Heurtey Petrochem Solutions, TR Engineering, and ITT Engineering India. 

Pros and strengths

Established track record with a diverse customer base: The company is in the business of manufacturing the process fired heaters, reformers and cracking furnaces (together, the Heating Equipment) that are required in process industries such as for oil and gas refineries, petrochemical and fertilizer industries. It commenced operations in 2010 and has a successful project completion track record of over 10 years. It has successfully completed projects which were based in far-reaching locations, which included its projects in India at Numaligarh, Assam; Kochi, Kerala; Barauni, Bihar; and overseas at Lagos, Nigeria. In recognition of its efforts, it has been accorded incentives by its customers for early completion of projects in India and overseas. Further, in March 2022, it was recognised for its safety compliance by one of the private refinery companies of a multinational industrial conglomerate from Nigeria and was awarded a certificate of appreciation towards ‘Safety Compliance and Campaign Performance’. Also, in November 2022, it was awarded a certificate of appreciation by the same refinery company, for providing four million safe manhours without a lost time incident and recognising its effective contribution towards installation of process fired heaters. 

Well-positioned to capture industry tailwinds through its demonstrated capabilities over time: The company has provided efficient solutions to its customers and has been selected by its customers repeatedly. It has stringent quality systems in place to ensure that the equipment supplied by it and/or services provided to customers meet or exceed the contractual and regulatory requirements. It has a team of experienced engineers and technicians who work closely with its customers to understand their specific needs and provide solutions that meet or exceed their expectations. It has an extensive workforce consisting of 69 employees in the engineering department. It also provides installation services to its customers to ensure that their products are installed correctly and function effectively. Further, since its inception it has been working closely with JNK Global. JNK Global is involved in the design, manufacturing, installation of process fired heaters. JNK Global is the only industrial-use process fired heater producer in Korea and is ranked amongst the top three industrial use process fired heater producers globally. Rise in global oil and gas refinery and petrochemical capacities are the key factors driving the growth in the global process fired heaters market. The company is able to leverage JNK Global’s global position, to bid for larger projects in collaboration with JNK Global. 

Diversifying product portfolio to cater to varied industries: The company’s Heating Equipment are required in process industries such as oil and gas refineries, petrochemicals, fertilizers, hydrogen and methanol plants etc. The company receives orders from domestic and overseas oil and gas refining, petrochemical and fertilizers companies. Its diversified Customer base has helped it in expanding its markets and improve profitability. The customers are primarily from, amongst others, the oil and gas, petrochemical and fertilizers industries. Heating Equipment such as process fired heaters and reformers are used in a typical refinery and are also an effective and efficient heating solution for a wide range of industrial applications, but proper design, installation, and operation are critical to ensure safe and reliable performance. Process fired heaters are the critical equipment in a refinery. Around 10 – 20 process fired heaters are used in any typical refinery. Of all the process fired heaters, four applications such as the CDU, VDU, delayed coker unit and catalytic reforming units are the most critical and the capex for these heaters is also high when compared with the other heater application areas in the refinery. It has recently diversified into waste gas handling systems which includes flares and incinerators systems as well. Flare system is a gas combustion device used in industrial plants such as petroleum refineries, chemical plants, natural gas processing plants, at oil or gas production sites with oil wells, gas wells, offshore oil and gas. 

Skilled and experienced Promoters and management team with committed employee base: The company is led by a qualified and experienced management team, with a deep understanding of the industry and its customers’ preferences and requirements. Its Promoters and Directors, Arvind Kamath, Goutam Rampelli and Dipak Kacharulal Bharuka and its Director Bang Hee Kim have an extensive experience in the Heating Equipment industry and have been instrumental in the growth of its business. its Promoters are supported by an experienced management team comprising Deepak Sake (vice president engineering with an experience of over 21 years, Mohsin Shaikh (assistant vice president projects) with an experience of over 15 years, and Vallathur Ravikumar Mudali (general manager, procurement department) with an experience of over one year, in the development and execution of projects in process fired heaters industry. Its qualified and experienced team enables it to identify new avenues of growth and helps it to implement its business strategies in an efficient manner.

Risks and concerns

High working capital requirement: The company’s business requires significant working capital for its business operation, furnishing of bank guarantees for participation in bids, financing inventory and any change in terms of credit or payment would affect its working capital. The working capital projections made by the company are based on certain key assumptions by its management and it may require alternative means of funding in Fiscal 2024, Fiscal 2025 and Fiscal 2026 even after the utilization of Net Proceeds. Its inability to meet its present working capital requirements or its enhanced working capital requirements will have an adverse impact on its results of operation, business and financial condition. Delays in payment under its existing contracts or an increase in inventory and work in progress and/or accelerated payments to suppliers, or an increase in the performance bank guarantee requirement could adversely affect its working capital, lower its cash flows and materially increase the amount of working capital requirements. Accordingly, it may require additional capital or financing from time to time to meet its working capital requirements. While there have been instances in the past, where it faced delayed payments under its contracts, a requirement to increase the inventory or work in progress, to accelerate payments to suppliers and to increase the performance bank guarantee requirement, it was able to manage within the available resources without having any adverse financial impact on its business.

Business subjects to certain risks due to operations in multiple jurisdictions: The company undertake in-house fabrication process at its leased facility, apart from engaging with third-party fabricators. Its facility is situated at a multi-product special economic zone at Mundra, Gujarat, where fabrication is undertaken for export purposes only. Further, it is expanding into other jurisdictions and planning to set up sales office in Europe and opening more branches in the Middle East and Africa. In addition, changes in laws and regulations, more stringent enforcement or alternative interpretation of existing laws and regulations in jurisdictions in which it currently operate can change the legal and regulatory environment, making compliance with all applicable laws and regulations more challenging. While there has been no past instance where its operations were affected by any of the above-mentioned risks, if any of these risks materialises, it could have a material adverse effect on its business, financial condition and results of operations. 

Carry out in-house fabrication at some leased facilities: While the company outsource most of its fabrication process to third-party fabricators and most of the fabrication takes place at the premises of the third-party fabricators, it also undertakes in-house fabrication process at two of its leased premises. In the event these existing leases are terminated or they are not renewed on commercially acceptable terms or at all, it may suffer a disruption in its operations. If alternative premises are not available at the same or similar costs, sizes or locations, its business and results of operations may be adversely affected. One of its facilities is situated at a multi-product special economic zone at Mundra, Gujarat, where fabrication is undertaken for export purposes only. Further, on situational basis and based on the requirement of its projects, it take certain facilities on lease basis and once the project is completed the facility is shut down and all the equipment and machinery are shifted to other facilities for other projects. This ensures project optimisation while providing it with logistical efficiency. One such facility was situated, at Jajpur, Odisha, where fabrication was undertaken only for one of its customer’s refinery and it terminated the facility pursuant to a termination letter dated April 1, 2024, due to commercial reasons. Its facilities may be subject to various operating risks, including those beyond its control, such as the breakdown, failure of equipment or industrial accidents, fire, power interruption and natural disasters.

Business may be subject to labour conflicts, strikes: The company is significantly dependent on workforce for its operations. The success of its operations depends on the availability of labour and maintaining a good relationship with its workforce. A shortage of skilled or unskilled personnel or work stoppages caused by disagreements with its workforce, strikes and lockouts because of disputes could have an adverse effect on its business, results of operations and financial conditions. As such, its relations with its employees to be amicable. While there is no instance of work stoppages caused by disagreements with its workforce, strikes, lockouts or labour disputes in the past, it cannot assure that it shall not experience any such disagreements, strikes, lockouts or labour disputes in the future. Such events could disrupt its operations and may have a material adverse effect on its business, financial condition and results of operations. It also engages third-party fabricators to perform either parts of its project or entire project. There could be a delay in the performance of duties by third-party fabricator or any conflict which may cause a delay in the completion of its projects. The company had subcontracted some fabrication work of heaters in relation to a project in Mexico. 

Outlook

Over the years, JNK India has developed a wide range of products to meet the evolving requirement of its customers. It offers a wide range of products primarily categorised under two segments – (a) Heating Equipment and (b) Flares, incinerators and others. It is one of the well-recognized process fired heater companies in India. It has capabilities in thermal designing, engineering, manufacturing, supplying, installing and commissioning process fired heaters, reformers and cracking furnaces. It is an ISO 9001:2015, 14001:2015, 45001:2018 Certified Company led by a Qualified And Experienced Management Team. Due to its long-standing relationship with its customers and its capability to provide customized solutions with a proven track record in product development and execution catering to the diverse needs of the customers, it has a competitive advantage, since there are very few competitors with similar capabilities. On the concern side, the company’s insurance may not be adequate to completely cover any or all its risks and liabilities. There can be no assurance that any claim under the insurance policies maintained by it will be honoured fully, in part or on time, or that it has taken out sufficient insurance to cover all its losses. Its inability to maintain adequate insurance cover in connection with its business could adversely affect its operations and profitability. 

The company is coming out with an IPO of 1,60,15,988 equity shares of face value of Rs 2 each. The issue has been offered in a price band of Rs 395-415 per equity share. The aggregate size of the offer is around Rs 632.63 crore to Rs 664.66 crore based on lower and upper price band respectively. On performance front, the company’s total income increased by Rs 1,144.09 million or 38.50% from Rs 2,971.36 million in Fiscal 2022 to Rs 4,115.45 million in Fiscal 2023. It recorded an increase in profit after tax by Rs 103.79 million or 28.84% from Rs 359.83 million in Fiscal 2022 to Rs 463.62 million in Fiscal 2023. Meanwhile, the company intends on accelerating and expanding to new geographies such as expanding to European countries and opening sales offices in the Middle East and Africa.  It will continue to expand its product portfolio and plan to provide diversified offerings to its customers through augmenting engineering capacities and technology partnership. It intends to selectively pursue strategic investment, partnerships and acquisition opportunities that complement its business and enhance technological capabilities, add credentials, or establish its presence in its targeted domestic and overseas markets.